Amit Varma’s just written one of the most concise summaries of the issues facing Indian business today and I think it’s relevant enough and impressive enough to post it here in full. More so as it creates the context in which to view India and China as the next powerhouses, or not.

The myth of India’s liberalization

Indian
Prime Minister Manmohan Singh is due to visit Washington in a few
weeks, and editorialists and commentators have already started writing
about the emerging economic power of India. New Delhi’s decision to
start liberalizing its economy in 1991 is touted as a seminal event in
India’s history, the moment when it threw off the shackles of Fabian
socialism and embraced free markets. It is the stuff of myth–and to a
large extent, it is exactly that.

While part of India has
benefited from being opened up to foreign products and influences, most
of the country is still denied access to free markets and all the
advantages they bring. India opened its markets in 1991 not because
there was a political will to open the economy, but because of a
balance-of-payments crisis that left it with few options. The
liberalization was half-hearted and limited to a few sectors, and
nowhere near as broad as it needed to be.

One would have
expected India’s growth to be driven by labor-intensive manufacturing
but, almost by default, it instead came in the poorly licensed area of
services exports. The manufacturing sector, ideally placed in terms of
labor and raw material to compete with China, never took off. India’s
restrictive labor laws, a remnant of the socialist infrastructure that
India’s first prime minister, Jawaharlal Nehru, put in place in the
1950s and 1960s, were politically impossible to reform. It remains
excruciatingly difficult for most Indians to start a business or set up
shop in India’s cities.

This is painstakingly illustrated in
“Law, Liberty and Livelihood”, a new book edited by Parth Shah and
Naveen Mandava of the Center for Civil Society in New Delhi, which
documents the obstacles in the way of any Indian who wishes to start a
business in one of India’s big cities. Messrs. Shah and Mandava write:
“Entrepreneurs can expect to go through 11 steps to launch a business
over 89 days on average, at a cost equal to 49.5% of gross national
income per capita.” Contrast the figure of 89 days with two days for
Australia, eight for Singapore and 24 for neighboring Pakistan.

But
often, even this figure is just a notional one, and entrepreneurs find
it next to impossible to get a legal permit to start a business at all.
Street hawkers and shop owners in the cities often cannot get a license
at all. (Even those who do have to comply with draconian regulations
that offer so much discretion to the authorities that corruption is
inevitable.) They survive by paying regular bribes to municipal
authorities and policemen, which are generally fixed in such a way by
this informal market that they can barely survive on what they earn,
and cannot expand their business or build their savings. They are
trapped in a cycle of enforced illegality and systematic extortion by
authorities, which results in a tragic wastage of capital. It serves as
a disincentive to entrepreneurship, as well as to urbanization, the
driving force of growing economies.

Another disincentive to
urbanization is how hard it is for poor people to get legal
accommodation in the big cities. In Bombay, for example, an urban land
ceiling act and a rent-control act make it virtually impossible for
poor migrants to rent or buy homes, and they are forced into extralegal
housing. The vast shantytowns of Bombay–one of them, Dharavi, is the
biggest slum in Asia–hold, by some estimates, more than $2 billion of
dead capital. For most of the migrants who live in these slums, India
hasn’t changed since 1991. As that phrase from India’s pop culture
goes, “same difference.”

India’s policymakers are aware of these
anomalies, but it is an acute irony in India that any proposal to
reform the bureaucracy has to first wind its way through the
bureaucracy. Arun Shourie, a former disinvestment minister and a
respected journalist, wrote in his recent book “Governance” that,
“proposals for reforming [the] system are adopted from time to time,
and decrees go out to implement the measures ‘in a time-bound manner.’
But in every case, the proposal is put through–some would say, it has
to be put through–the same mill.”

It is in the nature of
bureaucracies, Mr. Shourie points out, to endlessly iterate. He charts
how the apparently simple task of framing a model tender document took
the government more than 13 years, as drafts of it circulated between
different committees and ministries. Anything even slightly more
complicated, and with pockets of political opposition to it, like
economic reforms, becomes almost impossible to implement. Dismantling
state controls is only possible if there is political will and a
popular consensus. None of these exist. On the contrary, there is a
popular belief that the economic inequalities in India are caused or
exacerbated by free markets.

The socialist left, a natural
proponent of such views, believes that free markets are the problem and
not the solution. India’s communist parties have blocked labor reform,
opposed foreign investment and prevented privatization of public-sector
units. They naturally have a vested interest in the
“license-permit-quota raj,” as the web of statist controls is called.
On all these issues they are supported, surprise surprise, by the
religious right.

The Hindu right wing, led by the Bharatiya
Janata Party and collectively known as the Sangh Parivar, also fears
globalization. Its sustenance comes from identity politics, the impact
of which is diluted by the opening up of the cultural mindspace to
“foreign influences.” If people are busy chasing prosperity and gaining
Western liberal values, they will naturally have less time to focus on
“the Hindu identity,” and suchlike. Rabble rousers need the masses to
be disaffected.

In between the socialist left and the religious
right is the Congress, a party which occupies the center of the
political space almost by default. Its position on issues is always
malleable, and although it is currently the party of government, it
leads a coalition that depends on the left for survival. The pace of
reforms has not increased since it came to power last year, and is not
likely to do so anytime soon. While the world focuses on the
metaphorical bright lights of Bangalore, most of the country–indeed,
much of Bangalore itself, which has been plagued by power and
infrastructure problems recently–remains in darkness.